Asset protection trusts — both offshore and domestic — can be highly effective vehicles for protecting your wealth in today’s litigious society. But these trusts can be complex and expensive, so they’re not right for everyone. For those seeking simpler asset protection strategies, there are several basic, yet effective, tools to consider.
Some of these strategies involve transferring assets to another person or entity, or changing the way property is titled. Here are a few common asset protection strategies:
Insurance. For many people, insurance is the first line of defense against liability claims that expose their assets to risk. It includes personal or homeowner’s liability insurance, as well as professional liability insurance for doctors, lawyers and other professionals who are common targets for lawsuits.
Lifetime gifts. The most effective asset protection strategy may also be the simplest: giving your assets away to your children or other loved ones. After all, a creditor can’t come after assets you don’t own. The disadvantage of this approach, of course, is that you must relinquish control over the assets. But if you’re comfortable parting with assets during your lifetime, gifts are a great way to place them beyond the reach of your creditors.
Tenancy by the entirety. Many states permit married couples to hold their home or other real estate as “tenants by the entirety.” This form of ownership protects assets against claims by either spouse’s separate creditors. So, for example, it can be effective when one spouse is exposed to professional liability risks. It doesn’t, however, protect couples against claims by their joint creditors. Tenancy by the entirety, if available, is a good option for people who aren’t comfortable transferring title to their spouses.
Retirement accounts. Qualified retirement plans — such as 401(k), 403(b), and 457 plans, as well as certain pension and profit-sharing plans — are excellent asset protection vehicles. IRAs offer more limited protection. Assets held in most qualified plans enjoy unlimited protection from creditors’ claims — both in bankruptcy and outside of bankruptcy — under the Employee Retirement Income Security Act.
IRAs are exempt from creditors’ claims in bankruptcy up to a specified threshold (currently, $1,245,475, although it’s slated to be adjusted in April of this year). This limit doesn’t apply, however, to amounts rolled over from a qualified plan to an IRA or to future earnings on those amounts within the IRA.
Outside the bankruptcy context, the level of asset protection for IRAs varies depending on applicable state law.
Family limited partnerships (FLPs) and family limited liability companies (FLLCs). Transferring assets to an FLP or FLLC can be an effective asset protection strategy, especially if you wish to retain control over a business or other assets. To take advantage of this strategy, you simply set up an FLP or FLLC, transfer assets to the entity, and either give or sell ownership interests to your children or other family members.
You can maintain control over the assets by retaining a small (for example, 1%) general partnership interest in an FLP or acting as manager of an FLLC. Limited partners in FLPs — as well as managers and members of FLLCs — aren’t (except in very limited circumstances typically involving some personal wrongdoing) personally liable for the entity’s debts. And their personal creditors cannot reach the entity’s assets. Instead, these creditors are limited to obtaining rights to any distributions received by the limited partner or LLC member.
Assess your risk
Keep in mind that, for these strategies to work, you must implement them at a time when there are no pending or threatened claims against you. Otherwise, you may run afoul of fraudulent conveyance laws.
Before you weigh your asset protection options, it’s a good idea to conduct a risk assessment to evaluate your level of exposure. Armed with this information, you can determine which asset protection tools are right for you.
